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It's So Hot.

Does Anyone Really Know the Causes and Future of Climate Change

By Lisa Floreancig

According to some climatologists, the future very well could resemble something out of a Cecil B. DeMille Bible epic. Floods. Famine. Fire. Locusts. Well, maybe not locusts. More like the exotic Spreading Pine Beetle that has migrated to 12 northern states because of the earth's rising temperature.

And risen, it has. The Pew Center on Global Climate Change reports in "Climate Change 101, The Science and Impacts" how global temperatures have risen by more than 1 degree Fahrenheit during the last century with average warming of as much as 4 degrees Fahrenheit in some regions. More disconcerting is the fact that this warming trend has accelerated with the 10 warmest years since thermometer records became available nearly 150 years ago occurring between 1995 and 2005; and in the United States, the first six months of 2006 were the warmest on record. While no state had cooler than average temperatures during this period, five states - Texas, Oklahoma, Kansas, Nebraska, and Missouri - experienced record-high numbers.

Global warming is defined as increase in the temperature of the atmosphere near the Earth's surface and in the troposphere that can contribute to changes in global climate patterns. In everyday language, global warming often refers to the warming that can occur as a result of increased greenhouse gas emissions (carbon dioxide and other gases occurring naturally) from human activities.

Many climate experts as well as armchair environmentalists nod in agreement saying humans are the root of the global warming/climate change problem. Yet, scientific and industry reports and news articles couch the human element with such caveats as "likely to be the cause of" global warming, or global warming "may be the result of" or "in large part the result of" human activities.

James Valverde, Jr., Ph.D., vice president of economic and risk management for the Insurance Information Institute (III), and Marcellus Andrews, Ph.D., III economist, set out to explore the scientific uncertainty of the potential link between human-induced climate change and extreme weather.

"The last two hurricane seasons were hurricane seasons unlike any we have seen in this industry. And, of course, a natural question to emerge was 'are human activities somehow making this problem worse than it might otherwise be.' For me, it represented an important time to focus on this issue and to help the industry begin to grapple with this very complicated problem area," explains Valverde.

Yet, the issue is not new to the insurance industry. More than 30 years ago, the possible relationship between human activity and climate change was brought to the public's attention by mega-reinsurer Munich Re.

Valverde and Andrews' report, "Global Climate Change and Extreme Weather: An Exploration of Scientific Uncertainty and the Economics of Insurance," attempts to take a balanced and measured appraisal of the scientific evidence available on climate change and human activities. The economists found that there is currently no scientific consensus holding that there is a strong link between anthropogenic or human-induced climate change and increased hurricane activity in the North Atlantic.

"It is no surprise that there are, in fact, some diametrically opposed experts with world-class credentials in this regard, which speaks to the degree of scientific disagreement on this topic," says Valverde. "It is also very difficult to speak on an insurance-industry view because the industry is an amalgam of so many different viewpoints, perspectives, and business models. I don't see that there is one view emerging on the issue, yet, if we look globally at the major players, we can make an easy demarcation between the Europeans and everybody else."

Valverde says that Europeans for the most part have a different sensibility regarding the issues that deal directly or indirectly with global environment, a sharp contrast with North American or American views. "It is no surprise that European insurers and reinsurers were first on the scene in terms of their willingness to probe the subject and begin exploring the potential implication it could have for their industry and society at large. Perhaps the North American counterparts could be said to be coming to this whole debate a little later in the game."

With the 2004 and 2005 hurricane seasons still a fresh memory, some U.S. insurers are quickly realizing that today, the country has little in the way of land unblemished by the wrath of Mother Nature.

"If you look at the kinds of hazard maps that insurers often compile, they are very interesting because even a cursory look reveals that there is virtually no place in America safe from natural hazard risk," says Valverde. "If it's not a hurricane, then it is a tornado. Or, if you are in Seattle, you are at risk for a tsunami, or a volcano in Hawaii, or an earthquake in California."

According to a 2006 study by the Ceres investor coalition, U.S. insurers have seen a 15-fold increase in insured losses from catastrophic weather events in the past three decades, increases that have far outstripped growth in premiums, population, and inflation over the same period. The study, "Availability and Affordability of Insurance Under Climate Change: A Growing Challenge for the U.S.," warns of larger financial losses in the years ahead if climate change trends continue and no actions are taken to face the challenge.

One reason risk is up is the growing exposure found along the U.S. coasts. In October, CNNMoney.com ranked the top 10 places to purchase property as it relates to projected financial gain. The top two cities? Panama City and Vero Beach, Fla..magnets for hurricanes.

But it's just not Florida and the Gulf at risk. This past season, the insurance industry spent plenty of time in the Northeast educating people of hurricane risks and the steps needed to protect life and property. Valverde warns that the area is prime for a weather crisis, particularly since the Northeast has trillion-dollar exposures.

"We are due for something bad to happen to us. New York and Long Island alone have a tremendous amount of business and residential exposure," says Valverde. "The '04 Cat season was something like $30 billion in loss; last year was $61.2 billion in insured catastrophic loss. Where will it end? We as an industry are now openly talking about the possibility of going well beyond that into a $100 billion Cat loss year. It's not a question of 'if,' but 'when.'"

Valverde warns, however, that it is not the weather event fueling the huge catastrophic losses; it is, in fact, humans. "If you probe what underlies those kinds of projections, more often than not, it is not the hazard itself, the hurricane or wildfire or tornado. Those things have always been here. The simple fact of the matter is more people and more property are in harm's way. And that fact alone is enough to explain why we are openly bracing ourselves for what will inevitably be mounting catastrophic losses."

CAT modelers have begun to incorporate the effects of climate change into their work as well. According to the Ceres report, regulators are concerned because climate change is likely having a profound effect on insured losses, ultimately leading to a crisis of affordability and availability of insurance as well as solvency problems for the insurance companies.

The sting has already been felt among American insurance customers. In Louisiana and Florida, more than 600,000 homeowners' insurance policies have been cancelled or not renewed this past year, while in Massachusetts and New York, insurers have cancelled coverage of at least 80,000 coastal homeowners during the past two years.

Of course, there isn't much the industry can do to change the weather, but it can do more in the areas of mitigating loss. Increasingly, the industry has been trying to build awareness of those climate-change risks and how to circumvent them through regulations such as those that would create stricter, stronger building codes and more rational land-use planning.

Less than a year ago, AIG took the bold, initial step of becoming the first U.S. insurer to take a very public stance on the issue of human activities and their effect on climate change.

"AIG is a perfect example of corporate social responsibility in a post-9/11 era, and, how, with an issue like this, it can really have tangible effects. AIG's leadership position on this issue will no doubt be the start of a lot of people taking it seriously," says Valverde.

In May 2006, AIG established the Office of Environment and Climate Change, with Alice LeBlanc as its director. An economist by training and an expert on climate change, LeBlanc has worked in different capacities to promote market mechanisms as tools for environmental protection and sustainable development during the past 15 years.

That same month, AIG became the first major U.S. insurer to publish a policy acknowledging climate change as a serious, bona fide problem and outlining various initiatives the global corporation is taking to respond to the issues surrounding climate change.

"A big part of AIG's decision to address climate change is the political reality that this issue is being recognized worldwide and there is a global drive to reduce greenhouse emissions," explains LeBlanc. "In 2008, there will be greenhouse gas emissions limits in all the industrialized countries of the world except the U.S. and Australia."

However, says LeBlanc, state governments are beginning to understand the importance of addressing global warming and climate change. Last year, California passed a law to reduce its greenhouse emissions and the law will likely serve as a model for other states in the region; and seven northeast states have formed the Regional Greenhouse Gas Initiative that will limit the carbon dioxide emissions in the electric utility area.

There are also a handful of insurance activities focusing on the industry's newest concern. Green building credits and incentives are being offered for investing in renewable energy as well as rate credits for commercial building owners who rebuild damaged properties using green and LEED (Leadership in Energy and Environmental Design) building practices.

The focus of AIG's policy, however, is a bit more encompassing with its two-pronged approach involving new and existing products and the company itself. As the strategy is written, AIG will use core business activities to develop new products and expand and market existing products to support technologies and activities that will lead to greenhouse gas emissions reduction.

"We are also taking a closer look at our own environmental footprint, or the environmental impact, we have throughout our operations globally," says LeBlanc. "We are in the process of hiring consultants to help us assess this and figure out the best way to go about calculating our own greenhouse emissions inventory for 2006."

In addition to ongoing work in environmental remediation and liability insurance, other insurance initiatives are targeting existing products for developers of renewable energy (such as wind, biomass, solar), other mitigation technologies, and projects that generate carbon credits. AIG is also developing new products to ensure against the failure of a project to generate tradable carbon reductions.

"It is my opinion that there are things afoot in the U.S., too. That, to me, is why AIG responded. We are a huge global company, and there is a lot going on globally. We can't ignore responding to our customer and investor demand and worldwide demand to lower greenhouse emissions," says LeBlanc. "The debate can rage on, but many people and companies in different parts of the world are dealing with a real need to reduce emissions. Our job is to help our customers respond."

But, of course, global warming and its effect on the climate would not be an issue if the world's industrialized nations followed the Native American proverb, "we don't inherit the earth from our parents; we borrow it from our children."

Posted: Thursday, January 18, 2007 12:00:00 AM. Modified: Thursday, January 18, 2007 2:06:33 PM.

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